Tai Mo Shan, a subsidiary of Jump Crypto, agreed to a $123 million settlement with the U.S. Securities and Exchange Commission (SEC) on December 20, accusing it of misleading investors about the stability of its TerraUSD (UST) algorithmic stablecoin before its collapse. Agreed.
According to the SEC, Tai Mo Shan entered into an agreement with Terraform to purchase Terra LUNA (LUNA) at a deeply discounted price in 2021. Tai Mo Shan then purchased approximately $20 million in UST to maintain the algorithmic stablecoin’s 1:1 peg with the US dollar. . SEC Chairman Gary Gensler said of UST’s collapse:
“This impact has rippled across the entire cryptocurrency market, ultimately costing countless investors money. Regardless of label, cryptocurrency market participants must comply with securities laws where applicable and must not defraud the public.”
The collapse of TerraUSD in May 2022 sent shock waves through the cryptocurrency community and had significant implications for stablecoin regulation, such as the Lummis-Gillibrand Stablecoin Act of 2024, which bans algorithmic stablecoins.
Approval of the proposed settlement between Tai Mo Shan and the SEC. source: secretary
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TerraUSD Collapse
TerraUSD, an algorithmic stablecoin that maintains a peg to the US dollar through software and digital asset collateral, collapsed in May 2022. At the time, TerraUSD was the third largest stablecoin by market capitalization.
The descent of algorithmic stablecoins began on May 8, 2022, when whales dumped approximately $285 million into UST. This caused UST to lose its 1:1 dollar peg and trade at a spot price of $0.98.
On May 10, 2022, TerraUSD plummeted to $0.67, sparking a series of liquidations among long-term leveraged traders and creating more fear, uncertainty, and doubt among investors.
Amid the plunge in UST, the market capitalization of the algorithmic stablecoin grew significantly larger than the underlying LUNA reserves that serve as collateral for UST.
This meant that the algorithmic stablecoin did not have sufficient underlying reserves to back it up, which resulted in a complete collapse in the price of UST as investors panicked and sold off their UST holdings.
The collapse of UST and its aftermath prompted U.S. federal authorities to conduct a formal investigation into Terraform Labs and its founder, Dodo Kwon, who was indicted and received a steep $4.4 billion settlement.
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